A government-backed securitisation scheme has helped turn Italian banks’ balance sheets around. But as Covid-19 support measures ease, bad loans are expected to rise.
Non-performing loans (NPLs) in the Italian banking system totalled €203.3bn in April 2017, and were a cause of widespread concern in Europe. “The economic situation [after the sovereign debt crisis] and poor credit control in the banking sector caused bad loans to pile up,” says Maddalena Martini, economist at Oxford Economics. “But there has been a significant effort to turn Italian banks’ balance sheets around.”
In April 2021, the country’s NPLs totalled €52.1bn — the lowest level for more than a decade. Underpinning this effort has been the Garanzia Cartolarizzazione Sofferenze (GACS) scheme, which was introduced in 2016, offering banks that securitise NPLs a government guarantee on the least risky tranche of debt.
“The government guarantee has helped banks securitise their portfolios of bad loans and offer investors a more attractive price, rather than having to write them off,” says Gordon Kerr, head of European research for global structured finance at DBRS Morningstar.
GACS-backed disposals amount to €87bn, according to KPMG. In June this year, the scheme was extended for another year until 2022. Further portfolio sales that did not make use of the GACS guarantee have also contributed to the drop on NPLs.
The success of Italy’s efforts to get a handle on its bad loan problem can be seen in the slump in NPL ratios at leading banks. Banca Monte dei Paschi di Siena, for example, has seen its NPL ratio plummet from 21.29% in 2016 to 1.67% in 2020, according to The Banker Database. Banca Popolare di Milano, meanwhile, has seen its NPL ratio drop from 18.5% in 2016 to 3.13% in 2020.
Covid-19 impact
The economic impact of Covid-19, which caused Italy’s gross domestic product to fall by 8.9% in 2020, has yet to be fully realised on bank balance sheets because state-guaranteed loans and payment holidays on existing debt have kept insolvencies down.
“We would expect the number of NPLs to increase again as special measures are slowly removed, and companies that have been artificially supported by pandemic-related government funds will be exposed,” Mr Kerr says. “But by how much is dependent on a number of factors.”
Giorgio Di Giorgio, professor of monetary theory and policy at Luiss University in Rome, says a lot depends on the speed of the economic rebound under the new prime minister Mario Draghi’s government — which is implementing a EU-backed €235bn recovery plan — as well as how it handles pulling back support. “It needs to be well managed,” he says.
On June 30, the government opted not to extend a ban on laying off workers except in sectors hardest hit by Covid-19 lockdowns, such as textiles, shoemaking and fashion.
Even if the government eases out of support programmes gently, there will still be insolvencies
“Even if the government eases out of support programmes gently, there will still be insolvencies,” Mr Kerr says. “A lot of businesses that have been supported during this period will probably go under in the end. It’s just a matter of how many.”
Mr Kerr adds that while many households took up payment holidays, the data points to a lot of consumer debt payments restarting. “If it continues then hopefully we will not see too big of a spike in NPLs,” he says.
Mr Di Giorgio points out that Italian banks are much better capitalised than after the 2007–09 financial crisis as a result of consolidation and recapitalisation efforts. “Banks are better able to maintain the credit supply and do more to support corporate clients,” he says.
The first sign of rising NPLs will probably be in the fourth quarter of this year, Ms Martini says, adding that she expects the NPL ratio will peak around the second quarter of 2022. “But the elasticity of the NPL ratio and how much it will go up is still be determined,” she adds.
Continue reading: Is NPL securitisation banks' unlikely saviour?
